In the 2017 Medium-term Budget Policy Statement (MTBPS), estimates for 2017/18 tax revenues were revised downwards by ZAR50.8 billion to ZAR1 214.7 billion.
The major contributors to the downward revision were personal income tax (ZAR20.8 billion), VAT (ZAR11.4 billion), customs duties (ZAR5.4 billion) and corporate income tax (R4.8 billion).
The downward revision to tax revenue estimates was, however, broad-based, with estimates for all tax types being revised downwards.
The good news is that the bad news is unlikely to get worse. Based on revenue collections to end December, we expect tax revenues for 2017/18 to be broadly in line with the MTBPS estimates and possibly slightly better, off the back of a good performance in corporate income tax collections in
December and a strong recovery in import taxes since September.
2018/19 Tax Revenues
The 2017 MTBPS significantly reduced the medium-term estimated tax revenues for 2018/19 by ZAR69.3 billion from the 2017 Budget estimate, to ZAR1 315.1 billion. This estimate includes the additional tax increases of ZAR15 billion announced in the 2016 Budget.
The downward revision was a result of the base effects of the downward revision to the 2017/18 tax revenue estimates and a downward revision in the GDP growth forecast for the year.
Importantly, this downward revision in gross tax revenues is partially offset by a reduction in the Southern African Customs Union (SACU) payments of ZAR17.7 billion, resulting in a reduction in net tax revenues of ZAR51.6 billion.
In this context, the President directed the Minister and National Treasury to further cut expenditure by ZAR25 billion and create revenue-enhancing measures, including taxes, amounting to about ZAR15 billion in order to stabilise gross debt below 60% of GDP.
In light of this, it is expected that tax increases of at least ZAR30 billion (comprising the 2016 announced increase plus the recent direction from the presidency) can be expected to be announced in the 2018 Budget.
Given the announcement of free higher education, which was not factored into the MTBPS forecasts, it
is possible that tax increases will be even higher in order to fund this initiative, although indications have been that it will be funded through reprioritisation of expenditure.
Similar considerations apply to the establishment of the NHI Fund, where the phasing out of medical tax credits is being considered. However, we do not expect that additional taxes will be raised at this stage specifically to fund the NHI initiative.
In light of the above, it is expected that the tax revenue estimates will be increased by a further ZAR15 billion for 2018/19. Tax buoyancy ratios used in the MTBPS are expected to be maintained. With the real GDP forecast likely to be in line with that in the MTBPS and a likely lower forecast inflation rate, this will have a slight negative effect on the MTBPS revenue forecast, although this may be offset by a slightly better than forecast revenue performance for 2017/18.
PwC Re-imagine the possible 2018 Budget Predictions